International Monetary Fund Washington, D.C.

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1 2013 International Monetary Fund May 2013 IMF Country Report No. 13/145 February 6, 2013 January 29, 2001 January 29, 2001 January 29, 2001 January 29, 2001 Nigeria: Publication of Financial Sector Assessment Program Documentation Detailed Assessment of Observance of Insurance Core Principles This Detailed Assessment of Observance of Insurance Core Principles for Nigeria was prepared by a staff team of the International Monetary Fund as background documentation for the periodic consultation with the member country. It is based on the information available at the time it was completed in May, The views expressed in this document are those of the staff team and do not necessarily reflect the views of the government of Nigeria or the Executive Board of the IMF. The policy of publication of staff reports and other documents by the IMF allows for the deletion of market-sensitive information. Copies of this report are available to the public from International Monetary Fund Publication Services th Street, N.W. Washington, D.C Telephone: (202) Telefax: (202) publications@imf.org Internet: International Monetary Fund Washington, D.C.

2 FINANCIAL SECTOR ASSESSMENT PROGRAM UPDATE NIGERIA INSURANCE CORE PRINCIPLES DETAILED ASSESSMENT OF OBSERVANCE MAY 2013 INTERNATIONAL MONETARY FUND MONETARY AND CAPITAL MARKETS DEPARTMENT THE WORLD BANK FINANCIAL SECTOR VICE PRESIDENCY AFRICA REGION VICE PRESIDENCY

3 2 Contents Page Glossary...3 Executive Summary...4 I. Key Findings and Recommendations...7 A. Introduction...7 B. Information and Methodology Used for Assessment...7 C. Overview Institutional and Market Structure...8 D. Preconditions for Effective Insurance Supervision...17 E. Main Findings...19 F. Recommendations and the Authorities Responses...23 II. Detailed Assessment...30 Tables 1. Total Assets of Insurance Firms, Gross Written Premium, Non-life Insurance Development Metrics in Foreign Ownership of Insurers in Market Share of the Top Five and Ten Non-life Insurers, Market Share of the Top Ten Non-life Insurers, Market Share of the Top Five and Ten Life Insurers, Market Share of the Top Ten Life Insurers, Level of Retention of the Non-life Insurers, Level of Retention of the Life Insurers, Asset Mix of Insurers Investments, Market Capitalization of Listed Insurers, July Summary of Observance of the Insurance Core Principles Recommendations to Improve Observance of ICPs Detailed Assessment of Observance of the Insurance Core Principles...30 Figures 1. Distribution of Non-life Business Distribution of Life Business...12

4 3 GLOSSARY AML Anti-Money Laundering ANAN Association of National Accounts of Nigeria CBN Central Bank of Nigeria CFI Commissioner for Insurance CFT Combating the Financing of Terrorism CGCG Code of Good Corporate Governance CIIN Chartered Insurance Institute of Nigeria FATF Financial Action Task Force FRC Financial Reporting Council FSAP Financial Sector Assessment Program IA Insurance Act of 2003 IAIS International Association of Insurance Supervisors ICAN Institute of Chartered Accountants of Nigeria ICP Insurance Core Principles IFRS International Financial Reporting Standards IMF International Monetary Fund KYC Know-your-clients MAVICS Motor Accident Victims Insurance Compensation Scheme MoU Memorandum of Understanding NA National Insurance Commission Act of 1997 NAICOM National Insurance Commission (Nigeria) NFIU Nigerian Financial Intelligence Unit Nigeria Nairas OPEC Oil Producing and Exporting Countries RM Risk Management ROSC Report on the Observance of Standards and Codes

5 4 EXECUTIVE SUMMARY 1. Insurance activity in Nigeria is regulated by two Acts and supervised by the National Insurance Commission. The Insurance Act, No. 1 of 2003 governs the licensing and the operation of insurers, reinsurers, intermediaries, and other providers of related services. The National Insurance Commission Decree, No. 1 of 1997 established the National Insurance Commission (NAICOM) as the supervisory institution with the power of inspection, remedial and enforcement actions, and composition of fines. NAICOM is funded by industry levy and government grants, 50 percent of which is for operational purposes, 30 percent for upgrading industry capacity and 20 percent for industry development and compensation. Insurers must be established as limited liability companies under the Companies and Allied Matters Act, The insurance sector is an underdeveloped part of the Nigerian financial sector with assets less than 2 percent of GDP. Assets of the life business are about half of the assets of the non-life sector, reflecting the low level of activity in savings and investment insurance products. In terms of gross written premium, the insurance sector grew at an average rate of 23 percent from 2001 to 2010 but remains very small. The total premium income was 201 billion in , representing 0.7 percent of GDP or only just above a tenth of the average penetration of the OECD countries. The gross written premium is estimated to be 232 billion in The substantial increase in the minimum capital requirements in 2007 led to a reduction from 104 to 60 insurers in Further market consolidation, albeit at a lower scale, is expected in the coming months as a result of the banking regulation that requires banks to divest their non-banking activities, including insurance, by April Non-life insurance is more developed than life insurance. All non-life lines of business are offered, and their market share is balanced between motor, marine and aviation and property. Traditional life insurance is offered, of which around 70 percent corresponds to group life. However, modern life products, such as critical illness or inflation indexed benefits, are not readily available. 4. NAICOM has made a lot of effort over the past five years to improve the regulatory environment. Following the recapitalization of insurers and reinsurers in 2007 aimed at eliminating unprofitable and insolvent companies, NAICOM has upgraded its regulatory requirements, including a voluntary code on corporate governance, operational guidelines, risk management framework, KYC and AML/CFT requirements, and the adoption of IFRS. When fully implemented, these initiatives will significantly improve the 1 1 USD$ = as at August 25, At the date of the assessment, the divesture was largely completed, except one or two banks that require additional time to restructure. However, new statistics are not yet available post-divesture.

6 5 regulatory environment for the industry. A critical success factor is to provide NAICOM officers with the necessary technical knowledge and supervisory skills suitable for the new regime. 5. The legal status of the guidelines issued by NAICOM should also be clarified. NAICOM has the power under the law to make regulations and issue guidelines. The issuance of regulations is subject to the minister s approval while the issuance of guidelines is not. NAICOM has issued a number of significant prudential requirements in the form of guidelines, such as minimum capital, technical provisions, investment limits and risk management. It is important to have legal certainty on the level of enforceability of the guidelines. 6. The solvency regime, valuation and the reserve requirements need to be upgraded to capture the nature of risk inherent in each insurer. Current technical provisions and solvency margins are factor-based without regard to the nature of risks. The basis of estimating liabilities is left to the insurers or actuaries in the case of life business. The regime is in urgent need of revamping to become commensurate with the intended move toward a risk-based supervision framework. 7. Poor accounting and auditing practices results in supervisors spending too much time in verifying the accuracy of financial data. Supervisors spend more time verifying data than analyzing them. This not only hinders effective supervision, but also timely disclosure of information to policyholders and the market in general. NAICOM should collaborate with the FRC to improve the reliability of the audited financial statements, so that supervisors are able to focus more on both quantitative analysis and qualitative aspects of supervision. To promote proper governance, NAICOM should take insurers and directors to task for submitting inaccurate information. 8. Given the existing premium volume, the high capital requirements present a challenge to the attractiveness of the sector. Minimum capital requirements are high compared to other developing countries. For instance, countries under a Solvency I regime usually require for insurers a minimum capital of between US$ 4 and 10 million. Current Nigerian minimum capital requirements are three to six times higher. Except for the largest insurers, the return on equity is low as a result of low premium volume and high capital base. While the high capital is sensible to ensure professionalism in the industry, there is a need to study the appropriateness of the capital requirement to balance risk, return and market development. The minimum paid-up capital should be evaluated when introducing risk-based capital so that capital adequacy will reflect the risks that the insurer takes on. 9. Several insurers are in urgent need of evaluating their business viability. Some insurers need capital injection to comply with solvency requirements. Few insurers have made profits for 2011 according to the unofficial numbers available to NAICOM as of September The drop in stock prices of over 60 percent since 2007 has affected

7 6 investments in the insurance sector resulting in several publicly traded insurers losing all share premia and are currently trading at nominal value or the minimal share value required for listing. 10. Government is actively pursuing policy to address the need for the sector to grow; however, enforcement of compulsory insurance is suboptimal. There are six classes of compulsory insurance but enforcement is weak. More effective enforcement will provide a substantial stable premium income for the industry. NAICOM recognizes this and has been working with other relevant authorities to strengthen enforcement. Under this initiative, a motor insurance database will be launched in the coming months, aiming to stamp out rampant fake motor insurance certificates, by providing a quick and easy way for the enforcement agency and customers to verify the authenticity of insurance certificates. 11. Sufficient investment instruments exist to cover current short term insurance liabilities, but, as the annuities and long term insurance markets develop, there will be a need for longer term investment instruments. Both life and non-life companies have similar investment portfolios. The asset composition of insurers consists of short-term money market and bank deposits (30 percent), stock and private debentures (another 30 percent) and real estate, loans and government paper (40 percent). The need for liquid assets reflects the short duration of the existing liabilities in both non-life and life. As the occupational pension system matures, an increase in annuities is expected that will require long term investment instruments that currently are not readily available. 12. Reinsurance is influenced by market development considerations, at the cost of possible loss of knowledge transfer. Direct insurers are required to retain at least 5 percent of the risks to discourage fronting of business. Reinsurance with foreign reinsurers requires NAICOM approval, subject to the insurer demonstrating that it has exhausted local reinsurance capacity. Insurers must satisfy the mandatory cession to Africa Re before they may seek coverage with other reinsurers. Mandatory cessions, preferential tax treatment and supervisory exemption create an unlevel playing field and hinder competition. As local insurers could benefit from the transfer of technical know-how from foreign reinsurers, the exclusive use of local reinsurers for certain types of business should be reconsidered. 13. Consumer protection needs to be treated with high priority. As the compulsory insurance is enforced, the cost of intermediation of compulsory insurance and the purchase of retirement annuities need to be addressed to improve efficiency of the market. NAICOM should improve the disclosure standards, requiring intermediaries to disclose their capacity to act (whether as agent or broker), their financial interest in the policy, and any conflict of interest that might affect their recommendation of products. For annuities, electronic bidding models like the one existing in Chile would benefit the annuitants by enhanced cost transparency and reducing intermediation costs.

8 7 I. KEY FINDINGS AND RECOMMENDATIONS A. Introduction 14. This assessment provides an update on the significant regulatory and supervisory development in the Nigerian insurance sector since Nigeria undertook an initial Financial Sector Assessment Program (FSAP) in December 2001, which included a review of the structure of Nigeria s insurance market and the supervisory framework and approach. Nigeria has also undertaken reviews of its observance of international accounting and auditing standards (2004 and 2011), and corporate governance (2008). 15. The Nigerian authorities have taken steps to address a number of weaknesses identified in the 2001 FSAP. The insurance industry has gone through a significant consolidation, resulting in a decline of number of insurers and reinsurers from 118 in 2001 to 61 in Further market restructuring is expected as a result of a November 2010 banking regulation requiring all banks to divest non-banking business, including insurance and insurance broking, by April A new Insurance Act came into effect in 2003, supplemented by recapitalization guidelines in 2005, Code of Good Corporate Governance (CGCG) in 2009, Operational Guidelines in 2011 for insurers, reinsurers and intermediaries, and anti-money laundering (AML) regulations, know-your-clients (KYC) procedures and risk management guidelines in Insurers are required to adopt the International Financial Reporting Standards (IFRS) from The current assessment was conducted by Dr. Rodolfo Wehrhahn, staff of the International Monetary Fund (IMF) and Mrs. Mimi Ho, Insurance Supervision Advisor contracted by the IMF, during September 9 19, B. Information and Methodology Used for Assessment 17. The assessment was benchmarked against the Insurance Core Principles (ICPs) issued by the International Association of Insurance Supervisors (IAIS) in October The ICPs apply to all insurers whether private or government-controlled. Specific principles apply to the supervision of intermediaries. The ICPs are presented according to a hierarchy of supervisory material: a) ICP statements are the highest level and prescribe the essential elements that must be met in order to achieve observance. b) Standards which are linked to specific ICP statements and set out key high level requirements that are fundamental to the implementation of the ICP statement. c) Guidance material provides detail on how to implement an ICP statement or standard.

9 8 18. The rating reflects the level of observance for each ICP in the regulatory and supervisory approach with due regard to proportionality. Each ICP is rated in terms of the level of observance as follows: Observed: where all the standards are observed except for those that are considered not applicable. For a standard to be considered observed, the supervisor must have the legal authority to perform its duties and must exercise this authority to a satisfactory level. Largely observed: where only minor shortcomings exist, which do not raise any concerns about the authorities ability to achieve full observance. Partly observed: where, despite progress, the shortcomings are sufficient to raise doubts about the authorities ability to achieve observance. Not observed: where no substantive progress toward observance has been achieved. Not Applicable: when the standards are considered to be not applicable. 19. The assessment is based solely on the laws, regulations and other supervisory requirements and practices that are in place at the time of the assessment. Ongoing regulatory initiatives, such as proposed legislation, are noted by way of additional comments. The authorities provided a comprehensive self-assessment and other pertinent information such as reports, studies, public statements, websites, and guidelines. The assessors also met a number of Nigerian insurers, industry associations and other stakeholders. 20. The assessors are grateful to the authorities for their full cooperation, thoughtful logistical arrangements and coordination of various meetings with insurers and industry associations. In-depth discussions with and briefings by officials from NAICOM facilitated a robust and meaningful assessment of the Nigerian regulatory and supervisory regime for the insurance sector. C. Overview Institutional and Market Structure Institutional framework and arrangements 21. The insurance activity is regulated by two main Acts and supervised by NAICOM. The Insurance Act, No. 1 of 2003 (IA) governs the licensing and the operation of insurers, reinsurers, intermediaries and other providers of related services. The IA superseded the Insurance Decree, No. 2 of Insurers must be established as limited liabilities companies under the Companies and Allied Matters Act, 1990, with the exception of the National Insurance Corporation of Nigeria (NICON) and Nigeria Reinsurance Corporation. The National Insurance Commission Decree, No. 1 of 1997 (NA) established NAICOM as the supervisory institution with power of inspection, remedial and enforcement actions, and

10 9 composition of fines. The Governing Board of NAICOM comprises 11 individuals representing public interest and relevant public and professional entities. Functions of NAICOM include licensing; approval of premium rates, commission rates and policy terms and conditions; and protect policyholders and beneficiaries to insurance contracts. 22. NAICOM is funded by industry levy and government grants, 30 percent of which is earmarked for upgrading industry capacity and 20 percent earmarked for industry development and compensation. Approximately 20 percent of NAICOM s revenue is from the federal government (before transfers to the earmarked funds), and the remaining from (a) 1 percent levy on premiums, commissions and fees, (b) fees and penalties, (c) investment income, and (d) gifts and endowments. The earmarked education fund provides funding to insurance educational institutions, while the development fund finances initiatives to develop the insurance market and provide compensation to consumers. 23. NAICOM has strengthened its supervision and enforcement efforts. In the past five years, NAICOM has stepped up its vigilance in ensuring the accuracy of financial information and enforcing compliance. To give effect to the requirements in the IA, NAICOM has issued a number of code and guidelines on minimum capital, risk management, operations, corporate governance, AML and KYC. It has also mandated the adoption of IFRS from It has drawn up a roadmap to move toward a risk-based supervisory regime by the end of NAICOM launched a three-year market development plan in August 2009 to increase market capacity, improve market efficiency and increase consumer protection. The Market Development and Restructuring Initiative (MDRI) aims to deepen and grow the insurance market by focusing on four issues: Enforcement of compulsory insurance. 3 Sanitization and modernization of insurance agency system. Wiping-out of fake insurance institutions. Introduction of risk-based supervision. To create public awareness of the compulsory insurance, NAICOM has conducted several road shows in three geo-political zones in the north-west, north-east and south-west, and 3 There are six compulsory insurance coverages under various legislations. They are: a. Group life insurance in line with the Pencom Act 2004 b. Employers liability in line with the Workmen s Compensation Act 1987 c. Buildings under construction - Section 64 of the Insurance Act 2003 d. Occupiers liability insurance - Section 65 of the Insurance Act 2003 e. Motor third party insurance - Section 68 of the Insurance Act 2003 f. Health care professional indemnity insurance - under Section 45 of the NHIS Act 1999

11 10 distributed several free factsheets and leaflets to the public. While MDRI has not achieved its target premium level of 1 trillion in 2012, it has made progress in addressing each of the issues. 25. Improvements have been made to the mandatory motor third party liability with the introduction of a safety net. A Motor Accident Victims Insurance Compensation Scheme (MAVICS) was launched by NAICOM in 2008, providing compensation of third parties permanently disabled or killed by uninsured or unidentified vehicles. MAVICS is funded by the security and development fund. Market structure and industry performance 26. The insurance sector is an underdeveloped part of the Nigerian financial sector with less than 2 percent of GDP in assets. Assets of the life business are about half of the assets of the non-life sector reflecting a low level of savings and investment insurance products (see Table 1). In terms of gross written premium, the total sector grew at an average rate of 23 percent from 2001 to but remains very small with a total premium income of 192 billion, representing 0.7 percent of GDP in The gross written premium is estimated to be 232 billion in 2011 (see Table 2). Table 1. Nigeria: Total Assets of Insurance Firms, millions Non-Life Life Total As a % of GDP Source: NAICOM. Table 2. Nigeria: Gross Written Premium, billions Non-Life Motor Fire Accident Oil & Gas Marine W/Comp Misc Total non-life Life Total Source: NAICOM.2011 provisional numbers. 4 Source: Nigerian Insurance Association Digest 2011

12 The substantial increase in the minimum capital requirements in 2007 led to a reduction in the number of insurers from 104 to 60 in Currently, the industry is served by 32 non-life insurers, 17 life insurers, 10 composite insurers and two reinsurers. There are 1,737 registered agents, 542 brokers (excluding 32 suspended brokers) and 48 loss adjusters. Further market consolidation, albeit at a lower scale, is expected in the coming months as a result of the banking regulation that required banks to divest their non-banking activities including insurance by April Non-life insurance is more developed compared with life insurance. The non-life insurance sector is about three times the size of the life insurance sector. In terms of world ranking, the Nigerian non-life insurance industry ranked at 57 th and the life insurance industry ranked at 63 rd in All non-life lines of business are offered. Motor, marine and aviation, and property are the dominant lines. Around 70 percent of the life business is the compulsory group life. More sophisticated life products such as critical illness or inflationindexed benefits are not readily available. Figure 1. Nigeria: Distribution of Non-life Business Marine, Aviation, 31.9% Property, 15.6% Motor, 28.5% Miscellaneous, 23.0% Workers Compensation & Employees Liability, 1.0% Source: NAICOM, and Axco Global Statistics.

13 12 Figure 2. Nigeria: Distribution of Life Business Individual Life, 20.5% Other Life, 0.6% Group Pensions, 10.1% Group Life, 68.8% Source: NAICOM, and Axco Global Statistics. 29. Insurance penetration is very low. Non-life insurance penetration is around onehalf percent, or only one-seventh of the average penetration of the OECD countries in Life insurance penetration is even lower at around 0.2 percent. This comparison does not improve when a better measurement of insurance utilization is used, which takes into consideration dependence on the economic development of the country as well as the benchmarked insurance penetration against the world insurance penetration average (BMIP) for the non-life sector. The Nigerian BMIP value indicates that the insurance industry is underdeveloped with only 43 percent of the world average insurance penetration at the Nigerian 2010 GDP per capita level, placing Nigeria at the bottom of comparable countries, with the exception of Egypt. Table 3. Nigeria: Non-life Insurance Development Metrics in 2010 Non- Life Insurance penetration Penetration as a percentage of OECD average penetration BMIP Angola % Egypt % Ghana % Kenya % Morroco % Nigeria % South Africa % Source: Sigma and IMF staff calculations. BMIP is the insurance penetration benchmarked against the world average insurance penetration. The benchmark was developed by the average of the world insurance penetration calculated using data from 1980 to 2006 for 95 countries.

14 13 Regulation limits foreign ownership of insurers to 40 percent, but that limit appears to be flexible. The table below indicates foreign ownership above the 40 percent limit. Table 4. Nigeria: Foreign Ownership of Insurers in 2010 Insurance Company Owner & Percent Shareholding Country of Origin 1 Old Mutual Insurance Company Mutual & Federal Insurance Company, 70 percent 2 ADIC Insurance NSIA Participations S.A Holdings, percent 3 Guaranty Trust Assurance (now Mansard Insurance) Assur Africa Holding, percent 4 Prestige Insurance The New India Assurance Company Limited, percent South Africa Cote d Ivoire UK/German Private Equity India 5 Continental Re Local and foreign investors US private equity Source: NAICOM. 30. Government ownership has gone down but it remains in agriculture insurance. Following its policy of privatization and commercialization of public enterprises, the federal government has reduced its holdings in NICON Insurance and Nigeria Re from 100 percent down to a minority shareholding. However, the federal government still owns 100 percent of Nigerian Agricultural Insurance Corporation. 31. Minimum capital requirements are high compared with other developing countries. NAICOM has drastically raised the minimum capital in 2007 to eliminate unprofitable and insolvent insurers. For example, the minimum capital for non-life insurers was raised from 200 million to 3 billion. Countries under a Solvency I regime usually require for insurers a minimum capital between US$4 and 10 million. Current Nigerian minimum capital requirements are as follows: Non-life companies: 3 billion (US$19.14 million). Life companies: 2 billion (US$12.76 million). Composite companies: 5 billion (US$31.9 million). Reinsurance companies: 10 billion (US$63.8 million). Brokers are not required to have a minimum capital. 32. The solvency regime and the technical reserve requirements need to be upgraded to reflect the nature of risks. Assets for solvency purposes are on admissible basis, excluding unpaid premiums, intangible assets, foreign investments and investments in excess of prescribed investments limits. Technical provisions for non-life business comprise estimated unexpired risk, outstanding claims and 10 percent of outstanding claims as incurred but not reported claims (IBNR). Technical provisions for life business are the

15 14 amounts certified by the actuary as sufficient. Non-life insurers are required to keep a minimum solvency margin (that is, admissible assets less liabilities) of 15 percent of net premium, but not less than the minimum paid-up capital. There is no solvency margin requirement for life business. 33. The non-life insurance market is competitive, with only two companies having market shares of over 5 percent. Leadway and Custodian and Allied each having a market share close to 10 percent by gross written premium are followed by eight insurers each having similar market shares below 5 percent. The top 10 insurers account for 50 percent of the market. Table 5. Nigeria: Market Share of the Top Five and Ten Non-life Insurers, Top 5 companies (%) Top 10 companies (%) Source: NAICOM. Table 6. Nigeria: Market Share of the Top Ten Non-life Insurers, 2010 (In Million) Leadway Custodian and Allied AIICO NEM Guaranty STACO Sovereign Trust International Energy Zenith General Law Union and Rock 6,989 6,458 5,663 5,444 4,945 4,742 4,711 4,196 14,742 14, Source: NAICOM. 34. The life insurance market is dominated by one insurer holding around 20 percent market share. AIICO, a locally owned public company, holds around 20 percent market share. The next nine largest life insurers account for another 50 percent of the market.

16 15 Table 7. Nigeria: Market Share of the Top Five and Ten Life Insurers, Top 5 companies (%) Top 10 companies (%) Source: NAICOM. Table 8. Nigeria: Market Share of the Top Ten Life Insurers, 2010 (In Million) AIICO CrystaLife Niger Insurance African Alliance Leadway Crusader Capital Express Standard Alliance Life Assurance A&G UBA Metropolitan Life 4,009 3,666 2,746 2,668 2,402 1,950 1,716 1,362 1,279 8, Source: NAICOM. 35. Reinsurance is influenced by market development considerations, at the cost of possible knowledge transfer. Direct insurers are required to retain at least 5 percent of the risks to discourage fronting of business (Tables 9 and 10). Reinsurance with foreign reinsurers requires NAICOM approval, subject to demonstrating that the insurer has exhausted local reinsurance capacity. Foreign reinsurers must have a minimum financial strength rating of A- (Standard and Poor's) or A (A.M. Best). There are two locally licensed reinsurers, along with a representative office of a regional reinsurance company and Africa Re, neither of which are subject to NAICOM supervision. Insurers must satisfy the mandatory 5 percent cession to Africa Re before they seek coverage with other reinsurers. 70 percent of the oil and gas business must be retained in Nigeria and 100 percent for life business. As foreign reinsurers often provide product development and technical know-how to domestic direct insurers, the restriction of reinsurance with foreign reinsurers limits the knowledge transfer opportunities.

17 Motor Fire Accident MAT Workers compensation Oil and Gas Misc 16 Table 9. Nigeria: Level of Retention of the Non-life Insurers, 2010 (In Percent) Source: Axco Global Statistics. Table 10. Nigeria: Level of Retention of the Life Insurers, (In Percent) Source: Axco Global Statistics. 36. Both life and non-life companies have similar investment portfolios. The asset composition of insurers as indicated in Table 11 consists of short-term money market and bank deposits (43 percent for non-life and 34 percent for life), stock and private debentures accounting (25 percent for non-life and 22 percent for life) and the remaining investment are

18 17 distributed among real estate, loans and government paper. The need for liquid assets reflects the short duration of the existing liabilities in both non-life and life, which is group life dominated with little long term individual life business. As the occupational pension system matures an increment in annuities is expected that will require long term investment instruments that currently are not readily available. Table 11. Nigeria: Asset Mix of Insurers Investments, 2011 Type of Investment Non-Life Life Non-Life Life 2011 In million In percent Real Estate 40, , Loans to Directors Loans on Real Estate Loans to Policy Holders , Other Assets 1, , Statutory Deposit 14, , Government Bonds 10, , Listed Ordinary Shares 15, , Unlisted Ordinary Share 26, , Listed Debenture 1, Unlisted Debenture 2, Short Term Investments 94, , Shares in Related Companies 19, , Loans to Related Companies 3, , Other Investments 12, , Cash In Hand Bank Balance 18, , TOTAL 264, , Source: NAICOM. D. Preconditions for Effective Insurance Supervision 37. Nigeria is a highly densely populated country with a petroleum-based economy. With 162 million people, Nigeria is the seventh most populous country in the world, and the largest in Africa. Nigeria s GDP of US$169 billion (2009) is the 41 st highest in the world, and the second highest in Africa. A member of the Organization of Petroleum Exporting Countries (OPEC), Nigeria is the world s eighth largest oil producer and sixth largest oil exporter. It has the world s sixth largest deposits of natural gas. However, it s per capital GDP of US$2,600 (PPP basis, 2011 estimate) is behind Ghana (US$3,100) and Sudan (US$3,000). 5 Life expectancy of Nigerians is 51 years, and 55 percent of Nigerians live below the poverty line percent of Nigeria s labor force is engaged in agriculture, which 5 CIA World Fact Book. 6 Data from the World Bank, 2004.

19 18 accounts for 35 percent of GDP. Petroleum and petroleum products account for 95 percent of exports. Inflation was 13.8 percent in 2010 and 10.7 percent in The legal and judiciary system is British in origin. Nigeria operates a federal political structure under the Constitution of the Federal Republic of Nigeria of The Federation consists of 36 States and a Federal Capital Territory. The constitution vests the legislative, executive and judicial powers in the National Assembly, the Executive and the courts established there under, respectively. The powers of the States are vested in similar bodies, except that the legislative body of the States is known as the House of Assembly. The development of the Nigerian legal system has been greatly influenced by its colonial past as a part of the British Commonwealth. The common law of England, the doctrines of equity as well as statutes of general application in force in England as at January 1, 1900 form an integral part of Nigerian laws in addition to certain English statutes that have been incorporated through local legislation. The principles of judicial precedent and hierarchy of courts is also a fundamental part of the legal system with the Supreme Court of Nigeria at the apex of the court system. 39. The Financial Reporting Council (FRC) sets the accounting and auditing standards for Nigeria. NAICOM is a member of the FRC and sits on the board. The FRC has adopted IFRS and NAICOM has required insurers to adopt IFRS in their financial reporting from All Big Four accounting firms have presence in Nigeria, as well as other international and local firms. 40. Under Nigerian Law, Auditors are appointed by a special resolution passed at an Annual General Meeting of a company. Persons who are entitled to be appointed as external auditors are accountants licensed by either the Institute of Chartered Accountants of Nigeria (ICAN) or members of the Association of National Accountants of Nigeria (ANAN). The Report on the Observance of Standards and Codes (ROSC) on Nigerian accounting and auditing practices issued in June 2011 found that there has been limited implementation of the 2004 Country Action Plan and limited improvement in financial reporting practices in Nigeria. The ROSC opined that the weaknesses in financial reporting, auditing and accounting contributed to Nigeria s banking sector crisis. NAICOM has mandated the adoption of IFRS from January 1, The effectiveness is yet to be seen. 41. There are few professional qualified actuaries working in Nigeria. The use of actuarial valuation is not mandatory for non-life insurers and it is only required every three years for life insurers. The low demand for external actuaries is covered by one actuarial firm. The leading institution in Nigeria offering an actuarial science degree program is the University of Lagos, Lagos, Nigeria. The institution has been providing a bachelor degree program for many decades. There is a local actuarial society called the Nigerian Actuarial Society which, like the University, has been in existence for more than two decades. The Actuarial society is affiliated to the International Actuarial Association (not a full member), however it has not been very active in promoting development of the profession and further

20 19 education of the local actuaries and does not provide accreditation. Currently only five professionals working in Nigeria are fellows of foreign actuarial associations. The introduction of IFRS is creating demand for actuaries that currently the country cannot provide. 42. Some protection for claims against insolvent insurers is in place. The Insurance Act allows a portion of the levies collected from insurance institutions to be used for payment of any claims admitted by an insurance company where such claims remain unpaid by reason of insolvency or cancellation of the insurer s license. MAVICS provides compensation to individuals injured or killed by uninsured or unidentified drivers. Also, when an insurer is licensed, it must deposit 50 percent of the minimum capital with the CBN, which does add an element of policyholder protection in the event of non-payment of claims or insolvency. 43. There is a need to develop investment instruments of medium to long durations. The insurers have access to the Nigerian Stock Exchange and there is also a money market infrastructure. While these are sufficient to meet current short term insurance liabilities there will be a need for longer-term investment instruments that currently do not exist, as the annuities and long term insurance markets develop. Types of instruments available include treasury bills, treasury certificates, certificate of deposits, commercial papers, shares, bonds of federal and state governments and companies, and unit trusts. E. Main Findings 44. The legal status of guidelines issued by NAICOM should be clarified. NAICOM has the power under the law to make regulations and issue guidelines. The issuance of regulations is subject to the minister s approval while the issuance of guidelines is not. NAICOM has issued a number of significant prudential requirements in the form of guidelines, such as minimum capital, technical provisions; investment limits and risk management, although the AML/CFT requirements were issued in the form of regulations. NAICOM has taken the position that guidelines have the force of law, on par with regulations. The position has not yet been tested in courts. While the insurers have thus far complied with guidelines when prompted, it is nevertheless important to have legal certainty. 45. Prudential and solvency requirements should be updated to better reflect the risk profile of the operations. Technical provisions and solvency margins are factor-based without regard to the nature of risks. The basis of estimating liabilities is left to the insurers or actuaries in the case of life business. The regime is in urgent need of revamping to become commensurate with the intended move toward a risk-based supervision framework. 46. Poor accounting and auditing practices result in supervisors spending too much time in verifying the accuracy of financial data. Supervisors spend more time verifying data than analyzing data. This not only hinders effective supervision, but also timely disclosure of information to policyholders and the market in general. NAICOM should

21 20 collaborate with the FRC to improve the reliability of the audited financial statements so that supervisors are able to focus more on both quantitative analysis and qualitative aspects of supervision. NAICOM should also take insurers and directors to task for submitting inaccurate information to promote proper corporate governance. 47. NAICOM has put in a lot of effort to improve the regulatory environment in the past five years. Following the recapitalization of insurers and reinsurers in 2007 to weed out unprofitable and insolvent companies, NAICOM has diligently upgraded its regulatory requirements, including a voluntary code on corporate governance, operational guidelines, risk management framework, KYC and AML/CFT requirements, and adoption of IFRS. These initiatives will significantly improve the regulatory environment for the industry when the industry has fully implemented these requirements. A critical success factor is to provide NAICOM officers with the necessary technical knowledge and supervisory skills suitable for the new regime. 48. Given the existing premium volume, the high capital requirements present a challenge to the attractiveness of the sector. Except for the largest insurers, the return on equity is low as a result of low premium volume and high capital base. While the high capital is sensible to ensure professionalism in the industry, there is a need to study the appropriateness of the capital requirement to balance risk, return and development. The minimum paid-up capital should be evaluated when introducing risk-based capital so that capital adequacy will reflect the risks that the insurer takes on. 49. Several insurers are in urgent need to evaluate their business viability. Some insurers need capital injection to comply with solvency requirements. Few insurers have made profits for 2011 according the unofficial numbers available to NAICOM as of September The drop in stock prices of over 60 percent since 2007 has affected investments in the insurance sector resulting in several publicly traded insurers losing all share premia and are currently trading at nominal value or the minimal share value required for listing, as indicated in Table 12.

22 21 ITEM Table 12. Nigeria: Market Capitalization of Listed Insurers, July 2012 Source: Nigerian Stock Exchange. Price in Naira Quantity Issued / Market Value Market Capitalization Insurance Carriers, Brokers and Services 1 Guaranty Trust Assurance Plc ,000,000,000 16,000,000, Investment and Allied Assurance ,000,000,000 14,000,000, African Alliance Company Plc ,585,000,000 10,292,500, Universal Insurance Company Plc ,000,000,000 8,000,000, Custodian and Allied Insurance Plc ,100,846,808 7,651,270, Continental Reinsurance Plc ,372,744,312 6,949,738, Unity Kapital Assurance Plc ,000,000,000 6,500,000, Equity Assurance Plc ,847,298,420 4,423,649, Cornerstone Insurance Company ,820,010,000 4,410,005, Standard Alliance Insurance Plc ,493,173,450 4,246,586, Mutual Benefits Assurance Plc ,998,705,336 3,999,352, Lasaco Assurance Plc ,323,313,227 3,661,656, Intercontinental Wapic Insurance Plc ,061,804,000 3,644,498, AIICO Insurance Plc ,930,204,480 3,465,102, Sovereign Trust Insurance Plc ,871,757,394 3,435,878, Regency Alliance Insurance ,668,750,000 3,334,375, Oasis Insurance Plc ,503,506,792 3,251,753, International Energy Insurance Company ,420,427,449 3,210,213, Staco Insurance Plc ,141,087,609 3,070,543, Niger Insurance Co. Plc ,736,598,471 3,040,397, Consolidated Hallmark Insurance Plc ,000,000,000 3,000,000, Guinea Insurance Plc ,400,000,000 2,700,000, N.E.M Insurance Co (NIG) Plc ,280,502,913 2,640,251, Linkage Assurance Plc ,102,792,152 2,551,396, Goldlink Insurance Plc ,549,947,000 2,547,970, Great Nigerian Insurance Plc ,827,485,380 1,913,742, Law Union and Rock Insurance Plc ,437,330,500 1,718,665, Unic Insurance Plc ,581,702,105 1,290,851, Prestige Assurance Co. Plc ,508,315,436 1,279,240, Confidence Insurance Plc ,626, ,091, TOTAL 136,358,731, Government policy is actively addressing the need for growth of the sector; however enforcement of compulsory insurance is suboptimal. There are six classes of compulsory insurance but enforcement is weak. More effective enforcement will provide a substantial stable premium income for the industry. NAICOM recognizes this and has been working with other relevant authorities to strengthen enforcement. Under this initiative, a motor insurance database will be launched in the coming months, aiming to stamp out rampant fake motor insurance certificates, by providing a quick and easy way for the enforcement agency and customers to verify the authenticity of insurance certificates. 51. Consumer protection needs to be treated with high priority. As the compulsory insurance is enforced, the cost of intermediation of compulsory insurance and the purchase of retirement annuities need to be addressed to improve efficiency of the market. NAICOM should improve the disclosure standards, requiring intermediaries to disclose their capacity to act (whether as agent or broker), their financial interest in the policy, and any conflict of

23 22 interest that might affect their recommendation of products. For annuities, electronic bidding models like the one existing in Chile would benefit the annuitants by enhanced cost transparency and reducing intermediation costs. Table 13. Nigeria: Summary of Observance of the Insurance Core Principles Insurance Core Principle Level Overall Comments 1 Objectives, Powers and Responsibilities of the O Supervisor 2 Supervisor LO 3 Information Exchange and Confidentiality Requirements LO 4 Licensing LO 5 Suitability of Persons PO 6 Changes in Control and Portfolio Transfers PO 7 Corporate Governance LO 8 Risk Management and Internal Controls LO 9 Supervisory Review and Reporting PO 10 Preventive and Corrective Measures LO 11 Enforcement LO 12 Winding-up and Exit from the Market O 13 Reinsurance and Other Forms of Risk Transfer PO 14 Valuation PO 15 Investment LO 16 Enterprise Risk Management for Solvency Purposes PO 17 Capital Adequacy PO 18 Intermediaries PO 19 Conduct of Business PO 20 Public Disclosure PO 21 Countering Fraud in Insurance PO 22 Anti-Money Laundering and Combating the Financing of LO Terrorism 23 Group-wide Supervision NO 24 Macroprudential Surveillance and Insurance PO Supervision 25 Supervisory Cooperation and Coordination PO 26 Cross-border Cooperation and Coordination on Crisis Management NO Observed (O), largely observed (LO), partly observed (PO), not observed (NO), not applicable (N/A). Summary of Observance Level Observed (O) 2 Largely observed (LO) 9 Partly observed (PO) 13 Not Observed (NO) 2 Total 26

24 23 F. Recommendations and the Authorities Responses Recommendation to improve observance of ICPs Table 14. Nigeria: Recommendations to Improve Observance of ICPs Insurance Core Principle 1. Objectives, Powers and Responsibilities of the Supervisor Recommendations It is advised that NAICOM expand the objective to include the creation of a fair, safe and stable insurance sector for the benefit and protection of policyholders. NAICOM is advised to seek legal clarity on the legal standing of guidelines. 2. Supervisor To enhance operational independence and facilitate timely supervisory action, NAICOM should be the final authority in exercising its supervisory powers without having to seek the minister s approval for operational matters, such as appointment and dismissal of control positions. NAICOM should strive to strengthen its human capital, so that it will not rely on third-party consultants to carry out routine on-site inspections. 3. Information Exchange and Confidentiality Requirements For the avoidance of doubt, the NAICOM Act 1997 should be amended to give NAICOM explicit power to exchange supervisory information subject to appropriate confidentiality, purpose and use safeguards. NAICOM is encouraged to accede to the IAIS MMOU. NAICOM should establish procedures in handling request for information in the absence of an MOU to ensure consistent assessment of such requests. 4. Licensing NAICOM is advised to including considering the applicant s corporate governance framework and its group structure to ensure it is not too complex to be effectively supervision. To ensure that insurers have the necessary financial resources and competence in writing business, NAICOM is advised to consider granting license by lines of business. 5. Suitability of Persons NAICOM should ensure that significant owners and key persons in control positions are suitable. NAICOM should consider explicitly approving the appointment of directors, on par with the appointment of CEOs. In assessing the suitability of key persons, NAICOM is advised to include competence, financial and other indicators. To ensure suitability on an ongoing basis, NAICOM should formalize the existing practice of subjecting newly appointed directors to suitability test by requiring insurers to report any changes in board membership to NAICOM. This should be extended to include key person in control positions as well. 6. Changes in Control and Portfolio Transfers It is not clear that the 25 percent change in control requirement in the Operational Guidelines is enforceable, as it is not derived from any provisions in the primary legislation. NAICOM should amend the primary legislation to solidify its supervisory intention. At the same time, NAICOM should clarify (a) whether the threshold shareholding is based on issued shares of voting shares, and (b) it applies to both acquisition and disposal